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Moving from strength to strength; outlook improving

Aims to expand margin by providing higher engineering offerings

Order inflow environment improving, with a robust pipeline

The momentum in order wins continued into 1QFY22, with KECI winning ~INR30b worth orders in FY22 YTD (v/s INR7b YoY). This clearly indicates that the impact of the second COVID wave has been minimal on ordering intensity, albeit for Railways, which has witnessed some delays. Tenders under evaluation and in the pipeline stood over INR650b, thus indicating healthy potential order wins ahead. The management said it is seeing a steady revival in private capex, with an improving outlook across sectors like Metals, Mining, Cement, and Realty. The uptick in oil prices has led to significant opportunities arising from the MENA region.

Business diversification strategy playing out well

KECI has been steadily investing across the non-T&D segment of the business. As a result, it has the requisite expertise in key segments like Railways and Civil. The non-T&D segment constitutes 42% of the order book at present v/s 13% in FY16. This has led to Railways growing ~75% CAGR in the last five years, while Civil has grown 3x in FY21 (over FY20). Even within the T&D segment, KECI has entered 20 countries in the last five years, thus derisking itself from geographical risk and related competition. In the Civil segment, it is one of the few players having the capability to execute large projects.

Commodity cost inflation risk higher than ongoing COVID-19 disruptions

KECI has levers to hedge rising aluminum and copper prices, but not for steel. While the management is delaying projects with a significant exposure to aluminum, it cannot do so for steel. Hence, it expects some impact on margin going forward. The risk to margin may be minimal beyond 1QFY22 as prices have started cooling off late and recent bids have higher prices factored in.

Margin to scale up as business mix improves

In Railways, KECI has diversified its offerings into technologically enabled areas of overhead electrification (OHE), third rail and ballast-less tracks (BLT) for metros. This has led to double-digit margin in Railways in FY21, with KECI aiming for the same in the Civil segment in FY22. With a higher focus on engineering projects, it will participate in some higher margin tenders. Margin profile will also improve as the share of Civil business further increases. The management aims at double-digit margin in the near term.

Valuation and view

KECI has steadily diversified its business to avoid concentration risk from the Power T&D business, with the Railways and Civil segments emerging as strong growth avenues. Its performance over the past few years has been commendable, given that not many have been able to sustain growth with a topline of over INR100b in India in the EPC space. The company has all the ingredients in place for growth over the next 3-5 years. A strong promoter parentage and focus on the Balance Sheet should help KECI emerge stronger from the COVID-19 crisis v/s peers. KECI has an order book (including L1) of INR250b, implying an order book/revenue of over 1.9x. At the CMP, the stock is trading at 16x/13x FY22E/FY23E EPS. We raise our FY23E EPS estimate by 6% owing to favorable ordering outlook, and maintain Buy with a TP of INR475 per share (15x FY23E EPS, marginally below its long-term one-year forward multiple of 15.8x).

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